When, on top of the central bank making interest rates absurdly low, and the Barney Franks and other do-gooders urging banks to loan to the unworthy and threaten to fine them if they didn’t, a lot of bad loans were made by bankers to those who were irresponsible.  They had to, because a Jimmy Carter “Community Reinvestment Act,” would cause the irresponsible bankers to get sued if they didn’t make bad loans. In addition to the pressure from the CRA, ACORN was blocking bank drive through lanes with pickets, and threatening banks if they didn’t make bad loans.  Loans requiring no money down were made by the thousands.  All you needed was to be a minority, or a bad credit risk, have a low income, and want a home.  Sort of like the Bol Weevil in the song.  “Jus lookin’ for a home.”

Homes were being bought so fast, and with such easy mortgages, that home builders decided to build to meet the demand.  With the good times rolling, developers borrowed, bought land, built streets, sewer lines, underground utilities, and waited for spec house builders to show up and buy the lots.  A few did, but by then, the crash had started.  There’s thousands of empty lots on hundreds of empty developments in America today.

Banks might not have been so irresponsible, but for the fact that if they made a bad loan, they immediately sold it off to Freddie and Fanny, thereby releasing them from any risk.  Fanny and Freddie, then bundled the loans in batches, and sold them to everyone who would buy them.  When the bundled packages of mortgages were rated at AAA by rating agencies such as Moody’s, how could they lose?

Cheap money is what it was, and everyone was partaking.  Cheap money draws people like flies to honey. More dollars were created between the years 2000 and 2007 than in the entire history of America, and that’s nothing compared to what’s going on now. From 1998 to 2006, home prices went up 150%.  Homes didn’t change; only their prices.  Mortgages were given to virtually anyone, who immediately sold them to Fanny and Freddie, who resold them in attractive “AAA” rated packages to investors around the world.  Everyone was off the hook! Victims are the buyers of the packaged mortgages which were falsely rated “AAA.”  Home prices got so high, and the flippers of houses did so well, that when the obvious peak was reached and the bubble would simply have to pop, guess who was holding the bag?  Governments, pension funds, central banks, individuals, and you name it.  Why shouldn’t someone buy a packaged group of “AAA” rated mortgages?  Besides, the mortgage packages were insured by AIG, the world’s largest insurer.  How many hundred billion to AIG so far?  Then, brilliant Wall Streeters decided to place huge bets on the phenomena, called ‘derivatives.’  Hundreds of trillions of dollars worth.

Fanny and Freddie are government backed institutions, “too big to fail,” have been bailed out, and operate at the instructions, funding, and power of the Congress.  When the Barney Franks told Fannie and Freddie to make sub-prime loans to help the poor and worthless, they did, and told banks to send them all they wanted.  They did, and made even more bad, sub-prime loans to virtually anyone who walked in the door.  Mortgages were so easy, that thousands of people became “Mortgage Brokers” overnight, and set up in shopping centers and any available office space.  Everyone was having a blast!  Commissions and points were flying around like trailers in a hurricane. When the peak was reached, a chain reaction was started, which hasn’t stopped, nor reached the bottom yet.

All the while, before the peak was reached, the majordomos of economics, such as Sir Alan Greenspan, were encouraging people to get ARMS, or Adjustable Rate Mortgages, which was a sure guarantee of a failure.  Greenspan said in 2003 that “The notion of a bubble bursting and a whole price level coming down, seems to me as far as a nationwide phenomenon, really quite unlikely.”  It may have seemed “unlikely” to Sir Alan, but it didn’t to me.  When it started down hill, naturally we needed more government to fix it, so the “Emergency Economic Stabilization Act of 2008″ was passed, which authorized the Treasury to purchase $700 billion in assets “at any time.”  The taxpayer was on the hook.  Then there is the “Troubled Assets Relief Program Act,” which allows the Treasury to seize any financial institution’s assets at whatever price it dictates.  Then, short selling was prohibited under, “The Uptick Rule,” as it destroyed the banks reputation.  This is an outrage, of course, as are all the bailout programs.  Government officials are running around like the well-known chicken with its head cut off.  We now have the “Term Auction Facility Act,” the “Term Securities Lending Facility Act,” and the “Primary Dealer Credit Facility Act.”  Sound like more government to you?

On October 9, 2007, the Dow was 14,164.53.  See what the real estate crash did to even stocks? Let’s now get back to the primary cause, and that has to be interest rates.  The interest rate acts like a floodgate, or the market’s governing body, which keeps floods from ruining everything.  If the interest rate is controlled and manipulated, to ‘boost the economy,’ we get into a bubble phase, which feeds on itself, till it has to burst. My banker, I am sure, sets interest rates on those to whom he loans, based on their credit worthiness.  Interest rates, SHOULD NOT BE SET BY ANY GOVERNMENT OR PRIVATE BANK.  The setting of interest rates way below what the market would have set them, by the Federal Reserve, has caused the world-wide chain reaction we now see.  As you know, in my opinion, the Federal Reserve should be instantly put out of business, and the Congress should not subsidize or dictate to anyone.  The Fed raised interest rates and flooded the market with dollars 80 years ago, and caused the great depression.  It did the same thing between 1995 and 2000, by increasing the money supply 52%, which caused the ‘dot com’ bubble to burst.  The Fed’s lowering interest rates eleven times to help us out of the dot com bubble, started the housing bubble.  The Federal Reserve is an unmitigated fraud and disaster, and there is no logical reason for its existence.

To fix the mess we are now in by endless printing of dollars and creating more and more bureaucracy, is pouring gasoline on a fire. Hey DC Gang…STOP FIXING IT.

Regards,
Don Stott

March 13, 2009

When Central Banks Tamper with Interest Rates was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Yes, dear reader, the most volatile market in recent history could easily point its finger at a trader’s biology.

The conclusion will surprise you. The longer a trader’s ring finger, the more money he’ll make in the City (this study comes from across the pond in London, where top earners took home over $4 million – until just recently).  They measured the men up, and looked at their previous 20 months of P&L (profit and loss statements).  They also saw how long they’d lasted in the City.

Those with the longest fourth digit made over five times the money of their less-well endowed colleagues.  The average salary was $537k.  The long-ring group netted a healthy $828k, while the shorties had to make do with $145k.

OK, OK.  I bet you’re saying: what’s a couple of inches of bone and flesh gonna tell us about hormones?

Don’t know diddly about Darwin?  Think it’s just about DNA?  The real work of evolution starts with hormones. And the reminder of some serious prenatal hormonal action lies in the ring finger.

The Finger of Destiny: High-Stakes Day Trader or Value Investor

Measures are always relative to something. In this case, it’s the second digit: — the index finger.  They call this indicator the 2D:4D. This ratio is set before birth and stays with us throughout life.  Those with the longer fourth digit relative to the second often display rapid-fire execution ability. (See also: aggression, fertility, confidence, and sporting ability).

http://news.bbc.co.uk/1/hi/sci/tech/695142.stm

The accidental in utero testosterone junkie may well be set for high-stakes finance on the trading floor, simply because the developing brain becomes wired with a greater sensitivity to testosterone’s effects.

But before you run to get a ruler, let’s take a further look at what these 44 well-measured men reveal about the evolutionary life of Wall Street.

Testosterone, Cortisol & Your Next Investment

Coates, now Senior Research Fellow in Neuroscience and Finance at Cambridge, got a hunch while running a trading desk on Wall Street during the “dotcom” bubble.  He worked elbow-to-elbow with traders, when he noticed the change in traders’ behavior from pre-bubble methods.

Coates began to suspect a chemical was involved.  Just like Diane Fosse in the Rwandan jungle, Coates observed testosterone-related dynamics…even if the “competition” was between a trader at Goldman Sachs on 85 Broad Street and one working on the same trade, thanks to electronic trading, for Merrill Lynch halfway round the globe in Seoul.

The “winner effect” works like this.  Take two males in competition.  Testosterone rises.  They spar.  The winner comes out with even more testosterone and takes on a new opponent, while the loser skulks off with less testosterone.  Repeat.  And repeat.

Now for the end game (looking a lot like, say, former Lehman Brothers’ alpha wolf, Dick Fuld): the males, seething with testosterone, become overconfident.  Most importantly, they have increased appetite for risk.  They patrol areas that are too large (viz. commercial and residential real estate) and they pick too many fights (anyone starting another mortgage-backed securities pool in 2007).

So Coates remarked in the dotcom bubble and so we stand today.  The fact is, the dotcom bubble didn’t weed out anyone on Wall Street, because Manhattan Island is not a pure “Darwinian” island.  Instead, everyone just got shuffled around from investment bank to investment bank.  Top brass protected their own, sitting on each other’s boards and securing the “alpha wolf” salary and bonus.

And, sure, fast action juiced by higher levels of testosterone, is more likely to turn a profit — an abnormally large one at that.  But there’s one catch: cortisol.

Cortisol, a stress hormone, is seething in global traders everywhere…it comes when there’s the crash.  It’s the “fight-or-flight” friend that raises blood pressure, increases immunity, desensitizes us to pain. How does that translate into finance?  Cortisol renders the trader price-insensitive.  Monetary policy won’t matter.  He’ll see risk everywhere.

That’s because, long-term, exposure to cortisol ravages mind and body.  It affects memory recall — handicapping judgment with the shackle of fear — whether justified or no.  Like a kid who touches a stovetop for the first time, so is the trader who fears jumping back in the game that just burned him.

Is it time to fire all of Goldman’s males and change the name to Goldwoman?  The reason, in fact, Coates zeroed in on the testosterone test, was that the few female colleagues on the floor, he said, did not display the same behavior. Tellingly, the woman’s 2D:4D is almost equal and she has about 1/10 the testosterone of a man.  But she’s still got to contend with cortisol.  So the Wall Street ecosystem will remain chained to biological reflexes whose usefulness we may or may not have outlived.

Next Time You Hire: Measure Your Money Manager’s Index Finger

Here’s one more reciprocal fact.  A reverse advantage falls to those whose 2D is longer than their 4D.  It concerns a long-term market approach.

Taking a look at average finger ratios in university departments showed that the math, science and engineering-focused sport a longer index.  As you might guess it also suggest higher exposure to the opposite of testosterone – estrogen – in utero.  Estrogen helps the right side of the brain develop: good for honing sharp analytical skills.

Perhaps Mr. Madoff’s clients could have checked his pointer finger first, and those of his Florida club-hopping, dupe-hunting reps. But maybe we’d be surprised to find lengthy index fingers there…after all, the scheme was a “long-term” approach.

Most interesting of all, is that Madoff’s own sons and heirs cut short dad’s survival on the Wall Street three-ring menagerie.  He revealed the root of their inheritance, and they turned him in.  This positively Greek development in finance deserves the ushering in of the Furies from the wings.

Regards,
Sam Buker

January 23, 2009

Risk-Taking Traders Born Not Made was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

And what has been the means by which hundreds of millions of people have turned themselves into a race of clowns bound for extinction? Why, faith in the voting booth… Misplaced trust in the state…The usual stuff.

Government is simply the means of compounding mistakes, of bundling them up and paying them forward. Instead of the agility of the market, you get the lead foot and heavy hand of centralized planning. Mistakes that individuals would make and learn from—in the form of individual bankruptcies and failures—are necessary to keep a society on a healthy and sustainable path. That multitude of tiny failures throughout society is a required corrective feedback…but people—given the chance—come by and by to prefer the state’s interference to this natural process of failure and correction. The state impedes processes that are unpleasant in the short term, but healthy and essential for the long term.

Acceleratory hyper-growth is only possible with the streamlined efficiency of the state, but that efficiency and that growth come at the cost of inevitable overshoot. The actual slow and steady growth of a market-driven world is replaced by the state’s breakneck “efficiency,” but the mistakes that characterize the creative destruction of the market don’t magically disappear…they get stored up and unleashed all at once later.

Our tendency toward bad decisions manifests as massive governance itself. Government is simply humanity’s way of ignoring reality’s warnings…at least for a while… People cherish the roads, the trade, the complexity and comfort that come to fill their lives: Highways, globalism, social security, the peace of empire, systems too big and wonderful to go without and too big to fail …until they do.

The mobs always favor lending the state more power and the state is only too happy to keep the goodies coming by the usual scams: currency debasement, easy credit, foreign resource grabs. The market would probably never have brought us many of the supposed “goodies” to which we’ve become so accustomed and certainly not at the scales only possible with larger government. And we most likely would have been better off.

The state is essentially pretence to a wealth that doesn’t really exist. The state’s essence is welfare and warfare. It’s public works, make-work, misappropriation and misallocation.

Want more of something, but can’t afford it? Want roads, highways, more trade, or war when trade doesn’t work to your liking? No problem!

Guaranteed income in old age? Nationalized compulsory education (and indoctrination), nationalized health care, government guarantee against all failure? Just ask.

Why merely allow an economy to grow at that a glacial but natural rate? Just stimulate! Lower interest rates below what the stodgy market would have. When in need, print money and goose the system with pretend wealth.

And if all the above results in an infrastructure and lifestyle that require deals with the devil to prop up…? Well, a state can always resort to war.

Were an individual to commit pre-emptive murder (“my neighbors kept looking at me funny…”), take things that didn’t belong to him or pass bad checks, he’d be locked up before too long. If a smallish group of unelected individuals were to do this, we’d call them gangsters. But grand larceny, gangsterism and mass murder become things to celebrate in the hands of the state. In fact these things are the true raison d’etre of governments. Things that the sane and law-abiding individual would never dream of doing on his own become entirely reasonable when he is in the midst of a mob. That’s the appeal of government. The formation of the state is the manifestation of the uniquely human tendency to overreach. The state is the culmination of the wish to ignore limits: of ecology, of civility and of good sense. It specializes in fostering the unsustainable—spending, habits, infrastructure and population—through activities normally regarded as sin when done by any individual.

Right now the market seems to be telling us one thing, but the feds would like us to believe another. They want us to believe that we can and should keep zooming back and forth over massive distances, getting goods cheaply from around the world, showing up dutifully every day to our cubicles…but according to the market it’s time to reform our ways and redirect our energies…time to create a built environment worth inhabiting and more in line with what will work amid reduced energy availability and to occupy ourselves with things worth doing, like producing the things we need to live closer to where we live.

The market—oft-ignored augur of reality—seems to be telling us to expect to stay closer to home, to start a garden,maybe even to get to work on an actual farm. It’s time to come in from the exurban expanse. It’s time for the auto industry to die—the commercial airlines, too. Heck, if it hadn’t been for the federal government’s vigorous intervention neither of those industries might ever have assumed the size and importance they did in the first place. The market would have gotten in the way of a lot of the things we take for granted today…but then we wouldn’t miss them. Now we get to bawl as our presumed entitlements of conquering distance, of ease and plenty get ripped away from us.

The market is trying its best to start correcting those state-driven errors. Maybe it’s trying to pry coddled unionized workers from the cooling corpse grip of the auto industry so that labor can be (naturally) reallocated to local food production (farms). But the state will fight that by stealing a little bit from everyone in the form of inflation in order to prop up that which should fail. The same goes for every other “bailout.” The market says firmly “Time to stop this…and it was a dumb idea anyway,” but the state will resist…But that’s what states do. They try to defy the market by means of theft and force…and as a result bundle the mistakes and their consequences to be suffered all at once.

Please don’t misunderstand; I’m not calling for any edicts or proposed solutions from the state. That’s rather like asking the arsonist to help put out the fire. I don’t care much if climate change is man-made. I don’t care whether or not you believe Peak Oil is a hoax. I just know that somethin’s gotta’ give. We’ve gotten away with efficiently making collective stupid decisions for a long time. Now it’s time to get what we got coming…good and hard. What I expect to happen is for the mess to sort itself out with all the attendant consequences. Sometimes there’s no easy way out despite the wishing and the begging. Sometimes you can’t avoid the gnashing of teeth and the wailing that goes with it.

Regards and a Happy New Year,
Gary Gibson,
Managing Editor, Whiskey & Gunpowder

January 6, 2009

Compounding Error: Your Tax Dollars At Work was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Nonetheless, I was fortunate to call the top in real estate in the summer of 2005. A few others did, too. My rationale was the cover of Time magazine touting "Why We’re Going Gaga Over Real Estate" in conjunction with people camping out overnight to buy Florida condos. My thought at the time was, "It can’t get any sillier than this."

Well, it didn’t get any sillier than that in housing. But I sure was wrong about how long it would take for housing to finally start affecting the markets. The housing bubble morphed into a debt-financed stock buyback bubble, into a merger-mania bubble, and, finally, into buyout bingo.

The markets have a way of humbling nearly everyone. You either get humble or you go broke. The Bear Stearns hedge fund blowups should be proof of that. Two Bear Stearns hedge funds essentially went to zero. A third is waiting in the wings with redemptions suspended.

Based on intuition, greed, and other factors, I thought that Blackstone was going to mark the end of the LBO (leveraged buyout) silliness. Given that CDOs (collateralized debt obligations — typically, subprime mortgages) were plunging like mad, and given that LBOs, CDOs and merger-mania transactions were accounting for a huge portion of Wall Street profits, I thought that Blackstone was ringing a bell in complete silliness.

And with (or rather, because of) Chuck Prince, the Citigroup CEO, announcing, “No end to the buyout boom,” I decided to take a stab at calling a market top on July 10 on my Global Economic Analysis Blog daily commentary. The post was called “Quotes of the Day/Top Call.”

Here is a snip:

“[From the Reuters article] No End Soon to Buyout Boom: ‘When the music stops, in terms of liquidity, things will be complicated…But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.’”

Chuck Prince was, in essence, telling everyone to keep playing the "Greater Fool’s Game" on the basis that buyout bingo would keep on running.

Since then, over 60 leveraged buyouts have been canceled or delayed, and Citigroup is stuck in a commitment to finance TXU, whether the deal makes any sense or not (and it doesn’t). And it may cost Citigroup $1 billion to break the deal, if the deal can be broken at all. If not, Citigroup is stuck financing the deal, as opposed to securing financing for it. The difference is extremely significant.

Here is a chart of the S&P 500 when I issued my top call.

SPX – S&P 500 Weekly

Note: The above charts were compiled last weekend and do not reflect Monday’s rally or anything since.

Perhaps it would have been prudent to allow for one last blast to blow out the remaining bears. Who knows? I still could be wrong yet, as we are now bouncing off the 200-day moving average. But so far, the call has missed by about four days and 15 spoos points — not bad, given where we are today.

Nonetheless, I have been amazed by the taunts and jeers of bulls in the face of the decline since then. The more the markets plunged, the louder the catcalls became, smack in the face of this.

Blackstone

I will get to the catcall specifics in a moment, but first, let’s take a look at what Hussman is saying about the latest decline: Strong Economic Optimism (…Is a Contrary Indicator).

“‘The way to wealth in a bull market is debt. The way to oblivion in a bear market is also debt, and nobody rings a bell. Easy access to credit facilitates the marginal transaction. It enlarges the gross national product, expands the debt industry, and creates the rationale for a future relaxation of lending standards.’ …

[Mish’s Note: Hussman attributes the preceding quote to James Grant, “Michael Milken, Meet Sewell Avery,” 1989.]

“Despite credit concerns, Wall Street remains exuberant about economic prospects. Last week brought a six-year high in consumer confidence, evidently supporting the idea that the consumer remains strong and the economic expansion remains intact. Unfortunately, if you examine the data, you’ll quickly discover that consumer confidence is a lagging indicator, well explained by past movements in GDP, employment, and capacity utilization. Worse, for the stock market, it’s a contrary indicator (especially when it is well above the ‘future expectations’ component of the same survey). This is a fact that I’ve noted at both extremes, not only in early 2000, when new highs in consumer confidence supported a defensive position, but, conversely, in the early 1990s, when new lows in consumer confidence supported a leveraged position in stocks (prompting that ‘lonely raging bull’ comment in the L.A. Times ).”

With that backdrop, let’s look at some catcall arguments posted recently on my Global Economic Analysis daily commentary. Space considerations require that I break the catcalls down into basic ideas, rather than explicit comments. Here are those ideas:

Catcall Ideas

1. Consumer sentiment
2. GM earnings
3. Earnings in general are catching the inflationary gravy train
4. Rate cuts will save housing
5. Rate cuts will save the market
6. VIX went to 24; Bears will get roasted
7. Put call ratios
8. Low unemployment
9. Valuations are sound
10. Stocks are now selling at 16.5 times a conservative estimate of 2007 earnings
11. I am predicting Dow 15K by year’s end and 20K by the decade’s end
12. We are on the edge of a very huge boom that will astound us all
13. We are well above the 200-day moving average, and that is bullish
14. We are climbing a wall of worry
15. The weak dollar is pumping new life into manufacturing
16. Signs of a rebounding housing market are there if you look (pending home sales up 5% in June)
17. Man, the shorts were really covering hard, the last hour or so. Can’t the bears do any better?
18. We haven’t even had a 10% correction
19. Sitting in cash is stupid
20. I suspect today’s monster rally was the beginning of the next leg up in the bull. 15,000 by Christmas, along with 5-plus growth in Q4, indicating the economic boom has arrived along with a job boom.

Wow. All those reasons for a resumed bull market were presented, and the vast majority of them during the recent plunge. Oddly enough, No. 17 was presented last Thursday evening right before the huge plunge on Friday. No. 20 was extreme optimism about a one-day rally on Monday.

Hussman provided one answer to the consumer sentiment conundrum. My post Consumer Sentiment vs. Gasoline Prices provides another.

“Gasoline Prices

“I was thinking about the recent rise in consumer sentiment and I was asking, ‘How can this be? What has changed? Is the economy really getting better?’ Then it occurred to me that gasoline prices have been falling. That is odd, given that crude prices have been rising and are near all-time highs. Nonetheless, consumers do not give a damn about crude prices. They do, however, care about gasoline prices. And gasoline prices here have recently fallen over 45 cents (or more), even as crude prices are hitting all-time highs.

“Acting on a hunch, I phoned Bart at NowAndFutures on Thursday and asked him to put together a chart of consumer sentiment versus gasoline prices for me. Bart was happy to oblige. Thanks, Bart. Here is that chart.

“Wholesale Gasoline Prices vs. Consumer Sentiment

“In the above chart, gasoline prices are declining in scale. The previous reference to a six-year consumer confidence high by Hussman is based on the Conference Board Consumer Research Center, not the University of Michigan consumer sentiment index. But the correlation should be obvious: Consumer sentiment has tracked gasoline prices in the UMich poll ever since gasoline prices hit $2, back in January 2004.”

The VIX

The VIX hit all-time lows earlier this year. Is that really supposed to be bullish? Of course, we can rally a bit from here. Why not? But the chart suggests this move up has yet to peak. It might take years, too.

As for being significantly above the 200-day moving average…Well, that comment was obviously written in the very initial stages of the plunge. The charts are now struggling to hold those averages.

Wall of Complacency

About that wall of worry…Where is the worry? When the VIX plunged to all-time lows, complacency abounded and the market rallied. The market has since declined with the breakout in the VIX. Conclusion: The market was climbing a wall of greater fools, not a wall of worry.

GM

One cannot help but laugh on the GM comment. It was posted the day before GM sales in the U.S. plunged 22%, Ford sales by 19%, and Chrysler sales by 8.4%. Let’s see how the auto companies fare in a consumer recession.

Housing

The idea that housing is rebounding now is so silly that all it takes to refute it is one look at permits, starts, or inventories. Eventually, housing will rebound, but there are simply no signs of it now. Nonetheless, bulls are finding signs (and have been finding signs for 12 months running).

Low Unemployment

Low unemployment is an interesting argument. The question is not where unemployment is currently, but where it’s going. Please consider my blog post Martian Economists and BLS Moonbats.

“The Fed’s biggest fear should be of a collapsing economy, falling jobs, and a rising unemployment rate. And all three are going to happen. Look at the unemployment rate. It has bottomed and only has one way to go up.

“Already, foreclosures are at record levels nearly everywhere. Clearly, consumers are cash strapped. Even a modest 1% rise in the unemployment rate would wreck the consumer’s ability to meet debt obligations. All those who foolishly plowed into housing at absurd prices they could not afford (making Wall Street insiders filthy rich by unloading worthless CDOs for enormous fees to unsuspecting and/or greedy pension plans and insurance companies) are now facing margin calls of their own.

“Essentially, that is what is happening. Overleveraged consumers are now facing margin calls on their houses. For a while, homeowners were able to meet those margin calls by borrowing still further against rising asset prices. Now that home prices are no longer rising, there is no means to make those margin calls. Rising unemployment is sure not going to help any.”

Valuations

The idea that valuations are sound is certainly questionable. Merrill Lynch, Lehman, Goldman Sachs, Citicorp, etc. all made countless billions underwriting CDOs, LBOs, and mergers. In addition, debt-funded stock buybacks helped keep P/Es reasonable. All of the above were made possible by cheap funding. Profits have peaked for financials, housing, and transportation. For more on valuation, please see Tightening Cycle.

Will Rate Cuts Save the Economy?

Finally, I would like to address the idea that the Fed can save the economy and the markets by slashing interest rates. The idea is actually rather silly. The short rebuttal is that the Fed created the housing bubble by slashing interest rates to 1%. If that were the problem (and it was), that is simply not going to be the cure. It is simply illogical to assume the problem and the cure are the same. But Jim Cramer thinks otherwise.

I take on Jim Cramer in Will Rate Cuts Save the Economy? I would appreciate it if Whiskey & Gunpowder readers would click on and read that last link. It explains a lot about Cramer, bulls, and the idea that the Fed should be willing to react to save the stock markets.

But while I comment daily on my blog and weekly in Whiskey & Gunpowder, opinions about what to do about the twists and turns in the market are reserved for readers of The Survival Report. Seeing what’s happening is one thing. Understanding what’s happening is another. Knowing what to do about it is still another. The Survival Report is all about the latter.

Regards,
Mike Shedlock ~ “Mish”

August 8, 2007

Top Calls and Catcalls was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.